Post

Austin Campbell

Sep 28 • 20 tweets • 6 min read • Read on X

https://twitter.com/cz_binance/status/1839861237850497271

1/ Now that @cz_binance has been released, I want to take a moment to comment on the situation involving @binance and the US approach to crypto.

https://twitter.com/cz_binance/status/1839861237850497271

2/ First, it is almost certainly true that between 2018-2021, there were significant controls issues at Binance and material illicit finance issues.

This is not totally surprising to me; a business going from 0 to huge is going to have that kind of issue in any field if it handles money.

In fact, any scaled financial business in general has these issues, so those two factors combined definitely made Binance a target for money launderers, as insufficient controls + scale makes for a solid conduit for bad actors.

This is true across tradfi as well: criminals seek out the weak points to exploit them. It is the nature of the system.

3/ For context, during that same period, Goldman Sachs paid ~$3B for the issues in the 1MDB scandal, Standard Chartered paid a ~$1.1B fine for AML/KYC failures (including trading with sanctioned entities), UniCredit paid ~$1.3B for the same, and WestPac in Australia paid a nearly $1B fine for the same.

Compliance issues are rife throughout tradfi, and it is a subject I have been thinking about deeply and will be publishing more on with regard to how to effectively combat financial crime in general.

I would state my hypothesis here that there are probably significantly more severe issues in tradfi than crypto, but we just can't see them because the system is fragmented and opaque.

4/ From 2022 onwards, I believe Binance began to get religion on the AML issues. Today, when you look at criminal activity on the blockchain, although Binance still has some problems (no shock, they are the largest exchange by far, Binance not having problems would be like the combination of JPM + BofA + Wells Fargo all not having problems), they are probably at or below their "fair" share of criminal activity and certain other offshore exchanges (and banks) are a far greater problem with regard to criminal activity.

5/ I am, in fact, lucky enough to know some of the folks like @NoahBPerlman who are working to remediate these problems. Perfection is not possible, but we don't live in the 2018 era anymore either where there were few (if any) controls. If you still believe that, you need to update your information (just like many people had to update their views on bank risk after 2008).

6/ In addition to the forensics firms (TRM, Chainalysis, Elliptic), we also have increasingly good intel techniques in the space pioneered by @inca_digital to catch bad actors. Soon, we will be reaching the point where transacting on blockchains is absolute poison for criminals compared to the traditional financial system, if we have not crossed that point already.

To wit, we see things like Hamas asking for people NOT to donate in crypto anymore (too traceable) and criminals starting to have funds frozen increasingly fast with crypto scams, something not possible in many traditional scams once money leaves US borders.

7/ However, I worry that the jihad by some politicians against crime in the crypto space actually preventing us from solving the problem and moving us backwards! Crime is more apparent in crypto because public blockchains are, well, public, and thus it's easier to detect crimes.

However, detecting crime != the actual prevalence of crime. If we took a city with high crime and just abolished the entire reporting of crimes, that doesn't mean crime went down. It just means we don't have the data.

Given the tradfi system is mostly opaque and most money laundering is not detected, I will leave it as an exercise to the reader to consider if we have an accurate view of crime in that space...

8/ Instead, politicians scapegoat crypto because it is visible, and meanwhile things like this happen with very little commentary or consequences:

Note that Banamex has an ongoing multi-decade history of bribery, money laundering, and sanctions violations.nytimes.com/2022/01/11/bus…

9/ It's likely that many billions moved through the bank for the cartels and corrupt businesses! And that's just the tip of the iceberg for money laundering in the traditional system. Yet do we see a huge outcry in the press about this? No. Who is in jail for it in the US?

10/ This brings me back to @cz_binance. Binance paid a massive penalty and CZ himself went to jail in America for doing this, so let me ask the single most pertinent question I have on my mind:

Why is it criminal for Binance to launder money but not for banks to launder money?

11/ Put differently, despite money laundering issues on the same scale as Binance, no major bank CEO is in jail for these violations. In fact, it's basically a handful of lower tier employees who were bribed that ended up in jail, if that. The 1MDB scandal is the only outlier.

12/ And that might only have happened because of how big the 1 MDB story got in the news. So why do I bring this up? Fundamentally, if you believe what happened to CZ was fair in return for his conduct, then you also have to believe one of the following things:

13/ One, it's okay for banks to launder money and the issue with Binance was not that they were doing it, it's that they didn't get a license and pay their tithe to the government before committing the alleged crimes.

In short, the issue is just did you kiss the ring?

14/ Two, if you don't think it's okay for banks to operate multi-decade money laundering operations (or turn a willful blind eye to them), a lot more bank executives should be in jail if the Binance settlement was fair and just!

15/ This is why I find the whole Binance situation so odious in the end. If the conduct is that bad, and we all agree on it, why did we let all the bank executives who presided over similar things off the hook with merely smaller fines? Many of them even kept their jobs!

16/ Secondly, why are we continually attacking crypto only over this issue? If it's a real issue we want to solve, given the volumes of bad actors are much higher in the traditional system, should we not be looking there? Or is my first point true, where the real problem

17/ Is not the crime, just that Binance dared to step on the gov't / bank oligopoly turf without kissing the ring?

We have to make a decision on if we are running a corrupt system for the benefit of insiders, or if we actually care about having a transparent system that stops

18/ bad actors and crime. Here is my challenge: can anyone explain, coherently, why money laundering in crypto should lead to jail time and money laundering in tradfi should not?

Do we really think your choice of ledger is the real problem here?

Imagine a world where if you use excel records of payments to launder money, you get a small fine, but if you use an access DB to do the same, you go straight to jail and pay 10x the fine.

That's insanity!

19/ For those who want to know why I have been so critical of Warren and the Biden admin around crypto, this exact point is a large part of why. They are busy using crypto as a whipping boy to distract from the much bigger issues in the traditional system, which leads me to believe it's either a deeply cynical political play to distract from other issues and scapegoat someone while not solving actual problems, or they are so out of touch they don't even understand what the problem is and are incapable of solving it.

Neither of those are great options.

20/ So, in conclusion, one of two things is true:

One, this conduct isn't that bad and CZ was done dirty in comparison to tradfi players.

Or

Two, this conduct is that bad and US regulators & prosecutors have screwed the people (especially victims of crime) by allowing this conduct to continue in tradfi without effective controls, reforms, or jail time for those responsible in the traditional system, just small fines to look the other way.

We need to do better.

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More from @CampbellJAustin

Austin Campbell

@CampbellJAustin

Sep 20

1/ My worst fears have been realized.

Many will think that those are that Operation Chokepoint 2.0 is real. And here's the thing: I've known that for a while. What was not known to me was whether OCP 2.0 was founded on a concern about sophisticated understandings of the banking

2/ system connections to the traditional financial system (which I think are overblown, but some hold), or rather if it was based on mere technophobia and aversion to new technologies where the banking regulators were throwing the baby out with the bathwater.

3/ Well, my dear reader, I am here to tell you that I was wrong: there is a third option. That third option is that banking regulators actually have no idea what is going on and are going to take steps that demonstrate a profound misunderstanding of risk and will make the

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Austin Campbell

@CampbellJAustin

Aug 28

0/ I have a homecoming announcement, after having a surreal and exceptional experience earlier today.

I will be teaching at @NYUStern this fall, continuing my ongoing quest to improve the education around blockchains, decentralized finance, and fintech evolution in general.

1/ In 2010, I graduated with my MBA from @NYUStern. MBAs are a weird sort of degree sometimes, halfway between practical and academic in a way that can either be awkward or incredibly powerful.

Thanks to a number of exceptional professors, including David Backus (may he rest in peace), David Yermack (shockingly early to blockchain), Richard Sylla (a true financial historian), @VasantDhar (who is almost single-handedly responsible for my original interest in trading technology, so really you can blame him for all of this), and so many more I do not have space to name here, I left Stern with a far greater depth of understanding of finance than I expected.

2/ So first, some advice for MBAs: definitely, 100% take a class on financial history if you can. History does not repeat, but it does rhyme, and you want to know the playbook. Take classes on financial technology, the plumbing of the system, and when things break.

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Austin Campbell

@CampbellJAustin

Aug 9

https://twitter.com/ccatalini/status/1821924148941353180

0/ I want to echo @ccatalini here and double down:

When in history has it been a good idea to stand in front of technological progress and shout stop?

Historically, that's been a great way to get run over by the speeding train of human ingenuity. Not pleasant!

https://twitter.com/ccatalini/status/1821924148941353180

1/ In particular, the reason this is going to look so foolish is not some of the things you will hear from the OG crypto libertarian cohort (#BTC, as much as I think it's cool and is an interesting innovation, is not on the path to become money globally, ht: @GeorgeSelgin).

2/ Instead, the reason is that it fixes some of our biggest remaining issues from the 2008 financial crisis (and some earlier ones) and solves a problem that has yet to be solved: global economic coordination across a ledger.

There are three big elements to this:

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Austin Campbell

@CampbellJAustin

Aug 8

0/ Today, we are forced to return to an incredibly unfortunate subject: Operation Chokepoint 2.0.

I will include the press release from the Federal reserve at the end of this thread, along with @nic__carter's original article on OCP 2.0.

1/ So let's start with a quick summary. After the carnage of 2022 in crypto markets, and the belated realization by banking regulators that crypto was a risk, they came to a couple of determinations that have proven incredibly toxic (and maybe illegal):

2/ First, that crypto itself somehow poses a risk to the banking system. Ironically, the reverse of this has actually been demonstrated in practice (SVB posing a risk to @circle, though it is fair to criticize the latter for leaving a large uninsured deposit balance there).

Read 13 tweets

Austin Campbell

@CampbellJAustin

Jul 28

0/ So @GaryWinslett recently asked for a defense of crypto and why he, as a well-situated middle class American who largely thinks our system works, should believe in it or support it. I think that’s a totally legitimate question to ask, and one that cuts to the heart of why the debate has been so broken.

I think it was also asked in good faith, so I believe it deserves a real answer. One of my criticisms of the crypto space is that CT has a bad habit of just screaming at people instead of actually debating real concerns and questions, and I don't want to behave like that myself. Thus, I am going to endeavor to answer Gary in a few parts, and specifically point to some things I think align with the worldview of many antitrust folks, YIMBYs, classic liberals, and those who care about financial inclusion.

In other words, good question Gary, and I am glad you asked.

1/ One important thing to remember is that the starting point here is not neutral. The current position of the American government with regard to crypto is hysterically against. @SGJohnsson has a good thread on the receipts that I will put in the appendix of this post, so without turning this into a very long post about the wrongdoing of the Obama administration with regard to crypto, it’s important to understand that the current position of the administration is this:

If you have a token, you are a security, and there is no functional way to register or trade tokens as security, so your only recourse is to shut down. This is both unsupported by law (and if you don’t believe me, please read @NYcryptolawyer's scholarship on this issue) and a backdoor ban by the SEC without any legislative or commercial purpose behind it.

Also you’re not allowed to have a bank account. No, literally, the FDIC went around pressuring banks to close the accounts of almost all crypto companies in the wake of the 2022 events (and if you don’t believe me, read @nic__carter's piece on Operation Chokepoint 2.0, the details of which will shock you). This is the equivalent behavior to, when Bernie Madoff turned out to be a giant fraud, running around to all American banks to have them shut down the accounts of asset managers.

Additionally, Biden has been actively blocking all attempts to unwind what is, essentially, an extra-judicial blockade against the space. Biden vetoed the SAB-121 repeal, a custody rule promulgated by the SEC that bans people from doing crypto custody and, to make it even better, puts the assets of customers of crypto custodians at risk during a bankruptcy by making it entirely possible they are not bankruptcy remote. This is an anti-secure custody rule! And the Biden administration blocked the repeal, which was bipartisan!

Finally, if you look at the enforcement actions in the space, there have been a number of massive frauds: 3 Arrows Capital, Celsius, Terraform Labs, FTX, etc. How many of those were enforced against? Zero, until very far after the fact in a few lagging cases, and those mostly by the DoJ! Who did they enforce against? Coinbase, Kraken, Consensus, etc. Can anyone tell me what the logic is of an executive effort that specifically lets criminals go free until it blows up so much it hits the press, but attempts to prosecute those trying to obey the law and treat customers well? It’s hard to perceive that as legitimate.

In some cases, the administration itself is the criminal. The SEC was sanctioned for committing perjury in the Debt Box case, both forcing a whole project offshore and damaging the participants while lying to a Federal judge in such spectacular fashion that the entire Salt Lake City office of the SEC has been shut down after sanctions being levied against them. Again, none of that is hyperbole. This happened.

So my first point to people with the same question as Gary would be this: you may think your default stance is not caring, but your default stance is actually a complete disregard of constitutional rights and instead support for an extrajudicial, highly illegal, and incredibly stupid (if you don’t believe me, and you are a Democrat, imagine the Trump administration about to run this playbook against green energy, abortion providers, public sector unions, etc. and pointing at literally what Biden did as precedent) campaign against the industry.

TL;DR: we are not starting from zero. You’re actually on the side of a jihad against this technology, with the base assumption that it’s not just silly and useless, but evil on par with North Korea.

2/ Do you believe you should have to lend money to a real estate billionaire at below market rates to buy a coffee?

If you didn’t answer yes to that, you are actually opposed to the current structure of the financial system. When I say that kind of thing, most people look at me like I’ve grown a second head. However, this is precisely how the current system works, and reveals a point that I think most people don’t understand: our current banking structure is set up to hide the volatility and cost from the average user, so that you are the frog being slowly boiled and you don’t realize what is happening until it is too late.

This is such a long topic I’m writing a book that has multiple chapters about it (spoiler alert), but let me try to hit some key points here.

The first is that money in a bank is not safe.

I know I’m going to get a small army of objections about how as long as you are under $250k the FDIC will save you, but I’m going to raise two points in response to that. One is that for many small to medium businesses, this is simply not possible, and it’s not that they are rich - if you are in a high turnover, low margin business like a supermarket, you probably blow through that limit regularly but your actual net profit is far below it. So what’s the solution for you? There is none. Two is that the FDIC itself is not infinite and the insurance fund is certainly not sufficient to cover all, most, or even some of the deposits on an aggregate basis in the financial system. This means the FDIC is reliant upon good risk management at member banks, bailouts in the case of severe issues, and effective resolution of failed banks, all of which gets way harder in a crisis situation and requires some exceptional steering to survive. I’m lucky enough to know @SheilaBair2013, so let me tell you that this view does not start with me, and we still have 2008-era issues to chew on here that should be taken seriously and fixed!

You also often hear the cry of “well, you should due diligence your bank to make sure it is safe”, and I am here to tell you that is pants-on-head level crazy. Most people are just completely flying blind on this. I’ll remind the crowd that long, long before I was ever in crypto I traded one of the most bank capital focused trading books in the entire world (Bank Owned Life Insurance wraps, if we want to really go into the dark forest of finance), and I spent roughly 80-100 hours a week thinking about this problem and still couldn’t fully figure out the capital position and solvency of many banks. Did I have a decent guess? In many, but not all cases. Did I know for sure? No.

Thus, unless you genuinely believe that, in order to be allowed to have a bank account, the guy running the aforementioned supermarket should also have to become a bank capital expert solid enough to compete with psychopaths like me running trading books on the street, this is a complete lunatic position to hold (also where are they getting the time to run their actual business?). Don’t believe me? I dare you to go read some 10-Ks and Qs for banks. Let me know who YOU think the 5 most at-risk banks are for collapse in the next three months. Let’s see how good your results are and how long it takes you to figure that out. And if you don’t want to or don’t think you can, I actually agree that’s the smart thing to do. For anyone who doesn’t have this as a full time job, it’s a waste of time for nearly zero return.

Here’s the problem: our system is also based on the idea that you have to do this! Our regulators, in their wisdom, have decided to shut down better options within the banking sector itself for safe banking, as we can see from the sad story of things like the Narrow Bank or @CaitlinLong_'s Custodia. As a result, we have some hybrid solutions (like being able to pay for things with a money market fund through a debit card - Fidelity has a good solution for this that will be in a future article I’m writing about financial market structure), but currently, this brings us back to the first question I asked here: when you leave money in a bank, they make risky loans with it, often in the real estate space. This is the price of admission. You are exposed to that risk, the bank pays you 0% for it in most cases, but if the bank fails, you lose your money. Is that a fair trade? No. Oh, and the executives largely keep their giant bonuses at your expense.

It happens because we have given banks a monopoly on the payments system. Why did we do that?

That’s a great question. I'm not sure there is a good answer.

Read 9 tweets

Austin Campbell

@CampbellJAustin

Jun 13, 2023

https://twitter.com/lex_node/status/1668627925573447681

1/ A brief 🧵here as Gabe hits at the core of my concerns with the SEC approach.

The SEC is, allegedly, a regulator charged with protecting the integrity of markets. This includes protecting investors from scams, conmen, misinformation, etc. It includes policing insider trading.

https://twitter.com/lex_node/status/1668627925573447681

2/ It also includes liquidity, capital formation, and the general well-functioning of markets, either explicitly or implicitly (as blowing up market liquidity is sure not investor protective).

Given that things like IPOs and companies are long-term investments and the kinds of

3/ things that need clear rules of the road to operate, implicit in the SEC's mandate is that they need to actually make clear how all these things work. "Strategic ambiguity" serves only to inflate the ego and potential power of the SEC. It is, with certainty, damaging to

Read 7 tweets

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